Will the New Consumer Financial Protection Agency Actually Protect Consumers?

Elizabeth Warren, the visionary behind the idea of a consumer financial protection agency, says that it “could make a real contribution, a real difference in the lives of millions of families” by overseeing mortgages, credit card agreements, big bank overdraft policies, and other fine-print-heavy arrangements known to confound consumers. Other observers and interested parties have far less positive things to say about the new agency.

In a USA Today story exploring what the agency may do and how it might operate, Republican critics call the watchdog agency (which has yet to actually have a chance to do anything) a “monster” and the “Office for Credit Contraction and Job Loss.” One of the Democrats who led the way to form the agency didn’t exactly give it a ringing endorsement either:

“We’re setting up something unique,” Senate Banking Committee Chairman Chris Dodd, D-Conn., conceded this week. “We don’t know how well it’s going to work until we see it function.”

For those who are vehemently in favor of a consumer financial protection agency, the main criticism is that the new agency will not be a stand-alone organization. Instead, it will be a bureau within the Federal Reserve—the agency that everybody blames for not watching out for consumers in the first place. During the discussion phase, plenty of observers said that this bureau-within-the-Fed arrangement was completely unacceptable. For example …

Embedding consumer protection in the Fed could be worse than imperfect. By giving the imprimatur of a consumer protection office to an agency that has long resisted consumer protection, Congress risks creating a false sense of security among policymakers and the public. The Fed’s politically reactive posture is the exact opposite of the sustained care that consumer financial protection demands.

Certainly, the strangest compromise in the latest draft was the creation of a new consumer protection agency for financial products within the Fed, which until the crisis had a record in the consumer area unblemished by success.

Many consumer groups believe those efforts are too little and too late, however. John Taylor, president and chief executive of the National Community Reinvestment Coalition, said the organization had spent years raising consumer protection and fair lending concerns with the Fed, to little avail. “The Fed has repeatedly shown a lack of desire to enforce the laws that are already on its books,” Mr. Taylor said. Asked where he would want to house the new consumer agency, if not at the Fed, he replied: “I’d take the National Zoo over these guys. This is a place to bury it, or at least to make it ineffective.”

Sen. Robert Menendez (D., N.J.) said placing the bolstered consumer-protection authorities within the Fed was not “my favorite location.” Sen. Byron Dorgan (D., N.D.) called it a “terrible idea.” Vermont independent Sen. Bernie Sanders said he, too, didn’t support the proposal.

Barnie Frank called the idea “almost a bad joke” in the Washington Post, and Chuck Schumer had this comment:

“In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle,” Schumer said. “I am very leery of any consumer regulator being placed inside the Fed.”

The new agency is supposed to protect consumers from fraud, misleading and hard-to-understand contracts, and various other “gotchas,” and I sure hope it works. But I’m going to keep my buyer beware guard up indefinitely—and not only because the agency is part of the Fed. A watchdog can be helpful, but you still have to watch out for yourself.

At this early stage, it’s impossible to tell how effective (or not) the new agency will be. Elizabeth Warren, who may be selected to run the agency, had this to say in a Q&A:

Q: Some critics say that if you were selected to run CFPA, you would be an impediment. What do you have to say?
A: The big banks won’t like anyone who is effective. They are used to calling all the shots and making all the rules — and they want to keep it that way.

Q: If the Consumer Financial Protection Bureau is watered down before it is passed, what will you think?
A: There is an entire regulatory structure in Washington designed to protect the profitability of the banks. But there is no structure designed to watch out for consumers. The new agency would address that imbalance. But if the agency is weak, then there is no point in having it.